Tony Street: Port good example of strategic expansion

Many ports may struggle to maintain revenue now because shipping companies plan to use bigger ships at larger hub ports in order to make fewer stops.

However, against the trend Port of Tauranga is poised to surge further ahead. Because of its readily expandable infrastructure and strong balance sheet, this port is well placed to accommodate larger ships.

During the past year it increased container volumes 35 per cent to almost 800,000 TEUs.

Transhipment containers rose by 88 per cent, demonstrating the port's emerging role as New Zealand's hub port for international trade.

Rated by the Australasia Productivity Commission as Australasia's most efficient port, Tauranga seems well set to lead the way in investing in the infrastructure needed to handle bigger ships.

Named by research company New River as the country's "most exciting" international freight company, the port has delivered a 24 per cent compounding return to shareholders over the last 20 years, including reinvesting dividends.

This makes Port of Tauranga the best performing share on the NZ Stock Exchange over the last 15 years with a return well ahead of the benchmark NZX50 Index.

This is no accident.

For years Tauranga has used its capital resources astutely to lift cargo volumes and improve efficiency to build economic value for its shareholders.

Excellent return on capital objectives are matched by meeting environmental, regulatory, and health and safety standards.

The port has an outstanding record in kicking for the right goalposts when determining strategic capital development. That the port is well set to lead the way in investing in the infrastructure required to handle the bigger ships results from years of forward-looking, efficient management.

For Tauranga, a vital key has been to back innovation-driven capital investment with rigorous economic and financial analysis.

Proposed capital improvements are assessed on length of payback and discounted cash flow modelling is constantly used to compare project alternatives.

Chief financial officer Steven Gray says: "Profit and loss forecasts using measures such as nopat, ebit and ebitda are not enough. They cannot track the true costs of capital expenditure because they ignore the cost of shareholders' equity."

To efficiently expand port infrastructure, many capital expenditure proposals must be assessed.

For the past decade, the port has ensured all projects are evaluated consistently.

The discipline is uncompromising because board and management know overall return on capital depends on each individual investment proposal's success.

To better handle such make-or-break decisions, Gray in 1999 rejected ad hoc spreadsheet building as inconsistent, time-wasting and error-prone.

"As a lean organisation we instead use software to save time and increase confidence levels. It guards against poor investment by alerting us when business cases have faults.

"Thus when deciding the best time to replace a piece of major plant, for example, we make an assessment using Capex software," Gray says.

"And for many 'must-do' projects, alternative (often innovative) solutions may have financial and risk management impacts to consider."

Both shareholders and lenders take comfort from the port's professional management of its capital expenditure programmes and its refusal to spend hard earned capital resources on mere gut feel or arguably strategic projects.

No doubt they will welcome Tauranga's expansion plans - knowing the port's history of delivering on its capital investments.

International evidence backs the port's capex approach.

A McKinsey and Co study of 200 institutional investors found good corporate governance achieves a triple win - attracting capital, increasing the share price and reducing cost of capital.

About 75 per cent said good governance practices - commitment to shareholder value, majority of independent directors and transparent reporting - were as important as financial performance when evaluating investments.

Institutional investors were found to be willing to pay a 20 per cent premium for good governance.

In Port of Tauranga's case, it is currently tracking as the highest-priced NZ company on the NZX.